What is negative externality? A Thermal powerplant uses coal to produce electricity, sells it to the citizens.

. But the residents living near this Power-plant have to breath very polluted air- get various lung disease have to bear the medical expenses. The soot from the plant's chimney settles down on their homes, compounds, clothes, cars and they've to dust and clean it every day. This is a case of negative externality. Externality means : Two parties enter in a deal, and benefit from the deal. but a third party who is not involved in this deal also gets affected involuntary. (Without consent). Externality can be positive also. e.g I run a perfume-shop and local-residents get to enjoy the lovely fragrances for free. What is Pigovian tax? Suppose Government puts tax on the coal purchased by this Power-plant and uses this tax-money to provide cheap medical care to the residents of that area for respiratory diseases and gives them subsidy for buying special type of windows that filter the incoming polluted air in the house. Such tax is called the Pigovian tax, because a British economist Arthur Pigou argued about negative externalities and imposing taxes on companies involved in creating negative externalities. Now to the main topic of this article... What is Carbon tax The polluter will have to pay this tax on per tonne of carbon dioxide emitted in the atmosphere. It is an example of ^Pigovian tax. Implications of carbon tax? We know that companies pay the tax, but ultimately the consumer has to bear the burden. Consider this chain: There are two companies A and B. In the beginning, both are emitting same amount of carbon and hence have to pay same amount of carbon tax. So, They will include this Carbon tax costs in their product's MRP. (Maximum retail price). But later company A invests in new production technology so that their carbon emission is reduced, now they have to pay less carbon tax and thus their MRP will decrease = good for consumers and bad for second company B, because their product will remain expensive = less selling. So either company B will run out of business (like Kingfisher), or they will also invest in clean technology to reduce the production-cost. Ultimately good for environment and good for citizens. and Government can use the money collected using carbon tax for various schemes of environment protection. Why is it the news? EU -Airlines European Union imposed a carbon tax on all airlines from January 2012: about 6 Euros per ton of CO2 emitted. China, Russia, India and United States, have opposed the EU move. (Because their international flights will also help to pay this tax while flying over the skies of European union.) Australia's move Australian government also planning to implement carbon tax: about $23 per ton of carbon dioxide emitted by a company. Indian businessmen are concerned with this news because our steel companies import lot of coal from Australia. (a tit for tat case) Indian government had proposed Mines and Minerals (Development and Regulation) bill that a mining company should share 26% of its profits with local tribals. So Austrialian businessmen are also concerned! Mock Questions for Mains and Interview CSAT Prelims

Which of the following statements are correct? 1. India introduced the carbon tax (a.k.a. Clean energy cess ) in the Union budget 2010. 2. This Carbon tax rate is Rs.50 per tonne of Coal. 3. Companies have to pay this tax on Locally mined coal but not on the coal imported from other nations. 4. The money collected via this tax, is deposited in the National Clean Energy FunD !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Direct Tax You pay it on your income and property. 1. Income Tax 2. Corporate Tax 3. Wealth Tax ^ Direct Tax Code (DTC) seeks to consolidate them all in one book. Indirect Tax You pay it on the goods and services purchased. 1. Sales Tax 2. VAT 3. Customs duty 4. Excise Duty 5. Service Tax etc ^ Goods and services Tax (GST) seeks to combine them all in one book. Redistribution of wealth

Direct Tax follows the principle of redistribution of wealth in short it means: Tax the rich and use the money for the welfare of poors. You tax middle-class and rich-class, use that money to provide subsidized wheat for poor people = wealth is 'redistributed'.

Why do we need Direct Tax Code? (just covering the brief highlights without getting into details) All In ONE code

Right now we've different Codes for different taxes for ex. Under DTC, all the direct taxes will be brought under a single Code

Simplify the language for 'aam-aadmi'

So that even non-experts can interpretate the rules on their own, and no need to consult a tax-lawyer or Chartered Accountant every now and then.

Provide stability in direct tax rates

At present, the income tax slabs and rate are changed in every budget, thus keep keeping people on their toes.

Therefore, People have to keep making rounds here and there to tax-consultants and insurance agents to save themselves from higher-tax slabs, every year. DTC will provide stable brackets and rates for a longer time, (ofcourse they can be amended from time to time.)

Increase Tax to GDP ratio. It means the ratio of tax collection against the national gross domestic product (GDP). Right Government's tax collection is not optimum, because people get so many tax-exemptions. Under DTC, Men and women are treated same. Women would cease to enjoy income-tax exemptions Only senior citizens will get extra relief with tax exemption Tax exemption on LTA (leave travel allowance) is abolished. DTC removes most of the categories of exempted income. Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), House Loan principal repayment etc. Thus, Government's tax collection would increase, because there are less exemptions available. Plus, Government needs truckload of money for their inefficient schemes such as MNREGA and Food security bill, otherwise problem of fiscal deficit. In that sense too, DTC is very important for them. Rates under DTC:

10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on between Rs. 5-10 lakh, 30 per cent for above Rs. 10 lakh

Other provisions of DTC [Not covering everything in detail] Tax exemption on Education loan is continuing. Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not put to rent. But, under the Direct Tax Code 2010, such a concept has been abolished. Wealthtax 'cutoff' increased

Right now you've to pay additional tax if you own farmhouses, shopping malls, jewellery, vehicles etc 'wealth' above Rs.30 lakh. Under DTC, you've to pay wealth tax only if you own assets worth to Rs 50 core or above.

Corporate tax rate 30% (no surcharge or cess)

[Earlier they had to pay educational cess.] means now they've to pay less because there is no cess! Confused about what is 'Cess' Then click me! Combine this with "Stability" point explained above, and Foreign players would feel attracted to invest in India.

MAT (Minimum Alternative Tax) If approved, the DTC shall come into force on the April 1, 2012, and shall be applicable for income earned during the financial year 2012-13. ___________________________________________ Securities, Derivatives & Financial Market

As usual nothing 100% politically / technically correct. This article is about some very basic concepts. But Im writing this because youll need these concepts to understand the more complex topics like SEBI, Stock Exchange etc. Issues & Securities, 1. If I write on a piece of paper saying anyone who gives me 100 Rs., Ill give him 120 rupees after 6 months = this is public issue 2. If you give me 100 Rs. And take that paper- then that paper becomes the security Keep in mind that The 100 Rs you give to me or the 120 Rs. Ill give to you after 6 months- that is NOT Security. That Piece of paper is the security. Technical definition Security means a formal declaration that documents a fact of relevance to finance and investment gives the holder a right to receive interest or dividends. Security means A guarantee that an obligation will be met Shares, debentures. Theyre also securities of one type. You must be knowing about them already so just in brief-1. If for your 100 rs, I give you a limited ownership in my company and promise to give you the share from my profit = this is share 2. But if I say that, Ill give you 15 Rs. Every year no matter I get any profit / not = this is debenture. Derivatives / Stock Market Derivatives you gave me 100 Rs and I gave you a paper saying Ill payback 120 Rs. (=Mrunals security paper) there is another guy named Mitul who, same way borrowed 100 Rs. And gave you another paper saying hell pay you 120 Rs after 6 months. (Mituls security paper.) Now you need money before 6 months, so you write on a new paper, anyone who gives me 220 Rs, Ill give him 240 Rs. Worth Security papers of Mrunal and Mitul. that new paper you crated is again a security but it doesnt have direct-money attached with it instead, it derives its value from the security papers for Mrunal and Mitul. So your new paper is called Derivatives lets now deviate from our articles topic for a while to learn a few things related to recession from above talk. Mortgage, Asset bubble & derivatives You give me 100 Rs. And I give you paper saying if I dont pay back, you can take away my house this is mortgage. But again this is also one kind of security paper Now youre a big bank, so youve plenty of such mortgage papers because you give loans to lot of people. (even to those who cant afford to pay back the loan) Then you repack those mortgage papers (security ) and make a new security paper anyone who gives me 500 Rs. Ill give him mortgage papers of 5 houses = this is derivative product. Suppose 3rd guy bought such derivative papers and after few months, he repacks them- makes another derivative product and sell it to 4th guy. Such papers are one sort of asset (because you can get money from someone using it.) but as you can see, you did not create any new asset youre just keep reselling same stuff over and over to different people. So youre blowing a bubble After few months, I refuse to pay money, and tell the 4th guy to take away my home. But the prices in reality sector are low so even if you sell my home you cant recover your 100 Rs. = this is toxic asset / NPA = non-performing asset and your asset bubble is burst

Financial Market

 You gave me money I gave you a piece of paper (security) The place where we did this business is called financial market. If I had promised to pay back money in less than 1 year (=short term loan) , this will be called Money Market If I had promised to pay back money after long time like 10-20 years (=long term loan) , this will be called a CAPITAL MARKET. Players in Capital Market (diagram)

Subparts of capital market. As said above, when I take long term loan = its capital market. When initially I took money from you and give you piece of paper = this is PRIMARY market. *

 But after sometime, you need the money while Im going to pay back after 10 years. So you borrow 100 Rs from another guy and give that piece of paper (=security) to that guy. And tell him to recover the money from Mrunal = you traded my security. This is SECONDARY MARKET (Sharemarket / BSE/NSE etc) (*this primary market will be discussed in another article) our current article deals only with capital market.) Its the job of SEBI to control both Primary & Secondary Capital market in India. (detailed article about SEBI,BSE,&NSE is coming soon.) As you saw on above diagram that Govt. is also a player in capital market. So, Why does Government issue securities? Suppose Im the Govt. My expenses are more than my income = Im in deficit (gap) Ive following options to cover that deficit

1. Increase tax rates (income tax, VAT, import duties) But this will make people unhappy and theyll not vote for me in next election 2. Print more money But this will create inflation= again unhappy people= less votes. 3. Borrow from international institution (world bank / IMF) But if I borrow too much, Ill have to play by their tunes regarding Kashmir, Copenhagen, WTO-Doha. 4. Borrow from people within India This sounds safer! So Ill issue securities. (When you issue for the first time = youre in primary market.) keep in mind that Govt. does this for short term deficits. (its like I need money in October 2010 but youre going to pay income tax in March 2011 so Ill use this trick to cover my money needs.) Govt. generally plays only in the primary market. When you give me your money and receive that piece of paper (security) = you can be certain that Im going to pay back and wont run away like Ashok Jadeja. After all Im the Government. And I pay good profits. thats why Govt. securities are called Gilt-Edged securities How does this thing work? As I decided to issue security in primary market, but that doesnt mean Ill send my peon/clerk/Secretary to the primary market with bag full of papers (security) and sell it like vegetables. I give my piece of papers (security / treasury bills) to RBI- theyll give me the money and then RBIs men will sell it in the primary market. = RBI is Govt.s debt manager.* *Security Paper= Im going to pay money after some time. = Im in your debt. And RBI managers my security papers so theyre my debt manager. Separate debt Management office. Ok so now you know that RBI is Govt.s debt manager. But consider this RBIs main job = maintain liquidity (=money supply) in market via monetary policy (=CRR,Repo etc crap) But, When RBI sells Govt. securities in primary market, and give the money to Govt. = money supply flow is interrupted = liquidity is drying = harder to get loans = conflict of interest. Thats why many people are calling for separate Public debt Management office and relieve RBI from this duty.

Ok now ,final part in this article-As we saw, there are 2 types of capital market : Primary and secondary. but Why do we need Secondary market? Gives Exit Route Im going to return money to you after 10 years. So your hands are tied you cant recover it from me until next 10 years, so what if you needed money in emergency? Youve secondary market so youll sell my security to someone else and recover the money. Otherwise, In the absence of a secondary market, many of the investors would probably not agree to supply capital (money) in the primary market because they would not have an exit route for their investment. Gives Price information By active trading by millions of investor, you get price information regarding the securities. This price information is used to judge 1. the corporate performance (share prices) 2. performance of the Government 3. economy (through interest rates on Government debt). 4. facilitating value-enhancing control activities (mergers & acquisitions) and 5. enabling implementation of incentive-based management contracts (employee stock options). --------------------CDS = Credit default Swaps In simplest form Its buying insurance against a default. Example I'm a banker, gave car-loans to dude, but I'm afraid he might not pay back the full money. So I'll goto some other Bank X who sells Credit default Swaps (CDS). I've to pay regular premium Bank X, but if someday that dudes default on his car-payment, Bank X will pay me the money. RBI is currently drafting rules for starting a CDS market in India. These CDS bonds, once issues, can be sold and bought like any other bond or security. i.e. Bank X sells my CDS to Bank Y. So now Bank Y gets my premium but in case of default by that Dude, Bank Y is supposed to pay me. ----------------------------------------Index of Industrial Production: Meaning, implication, impact on Rupee-strength On repeated requests by multiple readers, here it goes Introduction When we say economy is booming or industry is facing a slump: how do we know? Mere by perception? But Government or Banks or investors cannot make their policies and decisions on perception, they need some quantifiable data to work on. Hence they need IIP (index of Industrial production). It is a number, that gives you idea on how industries are performing. <without getting technically so correct or in minute details> Suppose industrial output of India, in the year 2004-05 was 100 crore rupees. In 2010-11 it is 105 crore rupees. So simple percentage calculation: 5% increase in the industrial output over the base year. Newspaper headline: IIP shows growth of 5%.

For this industrial output value, weve to measure the output in three sectors (MEM) 1. Mining 2. Electricity 3. Manufacturing Then we take out the weighted arithmetic mean and that is our industrial output value. Then do all the index calculation of current year and baseyear. Meaning It is a single representative figure to measure the general level of industrial activity in the economy. It measures the absolute level and percentage growth of industrial production. Who calculates this IIP? Central Statistical Organisation (CSO) under the Ministry of statistics and program implementation. When do they calculate this IIP? Every month. Why do they calculate it every month? Because if they calculate every year, itll be too late for the Government or RBI to make necessary amendments in the policy ! Theyve to keep a constant eye on this number. For example 1. Automobile sector is facing very negative growth, Government may give them tax-holidays or allow them to import foreign machinery without paying import tax. [Fiscal Policy] 2. Negative IIP may mean People dont have money in their hands, so theyre not purchasing products (less demand) hence industry had to reduce the production or Businessman are having hard time borrowing because of high interest rates. = Change the repo, reverse repo CRR etc to increase money supply in peoples hands. [Monetary Policy] What are other Indexes? 1. Wholesale price index (WPI) (click me to read more) 2. Consumer price index (CPI): four subparts a. Industrial Workers (CPI-IW) b. for Agricultural Labourers (CPI-AL); c. for Rural Labourers (CPI -RL) d. for Urban Non-Manual Employees (CPI-UNME). What is the impact of poor Industrial Production? Here goes mere rephrasing of another article from Firstpost.com As a job seeker Lower demand will force businesses to invest less and scale back expansion plans. That means lower hiring. So, if youre looking for a job in the manufacturing/industrial sector, expect the going to get a little bit tougher. As a stock investor Lower industrial output means lower revenues and profits (which are also getting hit by higher borrowing costs). That lowers earnings per share for investors continuation of the poor IIP trend could lead to more earnings downgrades and lower stock valuations. Means FIIs start pulling their money out of India and invest it in different country = leads to weakening of rupee.(more below)

As a shopper manufacturers to offers discounts and freebies, to attract shoppers to stores. (haha like the Flipkart ads shown below!) Of course, shoppers will only be inclined to spend if they still have jobs or enough disposable income. As a borrower RBI may lower the rates, to increase the money supply in the market and make borrowing easier. As a producer/exporter: businesses using locally-priced inputs, there might be a silver lining in terms of costs, which could come down. if the prices of those inputs are based on international prices, they might not be so lucky because a falling rupee will increase prices in local terms. Now some real life examples End of rephrasing, now writing further on my own. IIP for October'11 : Rupee weakens had negative growth (-5 .1 percent). (This data was released in Dec'11) It sent panic among investors and SENSEX fell by 343 points. FIIs started pulling out money from our stock-market, they'd sell their stock-get rupees, get them converted into dollars and invest it elsewhere in different country. You get the picture: Demand of dollar$ increase and demand of rupee decrease hence the rupee made a new lifetime low of 52.** against the dollar IIP for December 2011 Very low +1.8 growth (In Dec'10 it was 8.1%!) This data was released in Feb'12. FII in crude terms, it is the foreign investors who invest money in Indian stock-market. They pull out their money immediatly if they see problem. More on FII vs FDI